Lippo Securities enters retail brokering
By Aloysius Bhui
JAKARTA (JP): PT Lippo Securities (Lippo) of the Lippo Group recently revealed to the media and stock analysts that it has launched a retail brokering service to anticipate a foreseeable growth in the number of domestic investors.
As the first and only listed securities company in Indonesia, Lippo's move raised questions about its business strategy and its strength in the domestic market, which is fundamental to investors deciding whether to invest in the company.
Moreover, the Jakarta Stock Exchange (JSX) is widely known as a market dominated by foreign investors. They contribute about 70 percent of the market's transaction volume.
Lippo's president, Charles De Queljoe, however, told an analysts' meeting recently that the management's decision is aimed at anticipating a strong upsurge in the number of domestic investors.
"Our vision is to become "the Merrill Lynch of Indonesia," De Queljoe told the meeting which was attended by 60 stock analysts from both local and foreign companies.
"You will eventually find Lippo's office in every major city or even medium cities throughout the country, just as Merrill Lynch has in the United States.
"We believe that the number of domestic investors will grow rapidly in the years to come. Within four or five years, domestic investors, both individuals and institutions, will account for 50 to 60 percent of the JSX's transaction volume," De Queljoe said.
In an interview with The Jakarta Post, De Queljoe disclosed several key assumptions driving his optimism.
He said that domestic retailing has been very active since the implementation of the JSX automated trading system in May last year.
A director of the JSX, Mas Achmad Daniri, also confirmed that since the stock exchange became automated, trading on the regular board has accounted for 60 percent of total transactions, as compared with only 30 percent before.
"We further believe that the planned scripless trading and remote trading will increase the participation of domestic investors. For us, scripless trading is very important," De Queljoe noted.
"I cannot emphasize enough that scripless trading will encourage securities companies to look for more retail investors," he added.
Chairman of the Capital Market Supervisory Agency (Bapepam) I Putu Gede Ary Suta once said that by the year 2000 all the shares listed on the JSX should be scripless.
There are 47 billion shares listed on the JSX now.
Another important factor, according to De Queljoe, is the enactment of the new capital market law, which, among other things, allows the establishment of open-end mutual funds.
"I believe that there will be many domestic funds to be set up. In addition to the law, tax incentives offered by the government recently will also encourage domestic funds," he said.
"Right now we deal in the physical environment. If you buy shares through us, we have to physically handle the share certificates. If it is a small order, because you are retail, it becomes expensive for us to handle the transaction.
"And it's changing. I think the government has planned to start scripless trading in the fourth quarter of this year. So it's the right time to start."
Strength
During the last five years of its operation, Lippo only served foreign clients. The company has set up a strong distribution network through its subsidiaries which operate in Hong Kong, Taipei, Bangkok and Manila. While in this country, it only operates in Jakarta.
De Queljoe, however, said that Lippo will make use of Lippo Bank's and Lippo Life's nationwide networks to strengthen its domestic retail base.
An analyst also said that as a bank-affiliated securities company, Lippo has already got strong support to penetrate the domestic retail market.
De Queljoe said that domestic retail is already a big part of Lippo's business. For the first four months of this year, domestic retails have accounted for 30 percent of Lippo's transaction volume every day.
Lippo Bank now has 108 offices Jakarta, 14 in the greater Jakarta area, 34 in West Java, 75 in Central Java, 28 in East Java, five in Bali, 30 in Sumatra, six in Kalimantan, two in Sulawesi and one in Ambon.
And Lippo Life has three financial centers, 134 branches and counters and 5,200 agents.
De Queljoe also said that the management has budgeted Rp 4 billion this year to improve its infrastructure and computer system.
The new network, yet to be fully developed, is an integrated one which has both back-end and front-end systems.
"The new computer system will allow us to make on-line real time transactions from other cities," De Queljoe said.
He said that the system, which is expected to be effective in October, is also designed to be easily interfaced with the Lippo Bank and Lippo Life computer systems.
In a addition to a wide distribution network the company has a large capital and strong research team.
On account of its sound research, Lippo has been declared the best securities company in Indonesia by Euromoney in 1993, 1994 and 1995.
It was also labeled the best underwriter by a local economic magazine last year.
With a total equity of Rp 170 billion (US$72.3 million), Lippo is believed to be the largest capitalized securities company in Indonesia today.
Performance
Lippo, which was established in 1989 by the Lippo Group and then became a joint venture company in 1990 when the Swiss Bank Corporation (SBC) joined the company, is licensed to provide corporate finance, brokerage and financial advisory services.
In the past four years, Lippo executed 29 transactions as lead manager and co-manager, raising debt and equity capital of Rp 3.6 billion for Indonesian companies both in the primary and secondary markets.
It has also underwritten eight debt and 25 equity capital market transactions.
On stock transactions, Lippo was placed among the top brokerage firms on the JSX in both of the last two years.
For the first three months its total stock transactions value on the JSX reached Rp 1.2 trillion or 65 percent of its 1995 total volumes.
"This year, we have been mandated to execute at least four IPOs and two rights issues together with three advisory assignments," De Queljoe said.
Lippo's total revenues rose from Rp 17 billion in 1993 to Rp 44 billion in 1994 but then declined to Rp 24 billion last year due mainly to the sharp drop of corporate finance revenues from Rp 22 billion in 1994 to only Rp 1 billion last year.
It's net profits were Rp 7 billion in 1993, Rp 26 billion in 1994 and Rp 14 billion last year.
Its earnings per share also declined by 47 percent from Rp 204 in 1994 to Rp 108 last year.
De Queljoe said that the decline in Lippo's earnings last year was due mainly to the overall weakness of the JSX, in line with regional trends.
Other listed brokers in the region also suffered from earnings drops. Vicker Ballas' earning per share dropped by 45 percent, GK Goh by 58 percent, Kim Eng by 42 percent and Kay Hian James Capel by 40 percent.
In early January, Lippo's share price hit its lowest ever level, Rp 650, as investors became jittery over a reported split between Lippo and SBC in addition to the bad earnings report.
But the speculation ended in mid-January when the Lippo Group bought all of the 17.2 percent stake owned by SBC. The buy-back transaction also turned it into a national securities company.
The share price then went up by 85 percent from Rp 850 at January's close to Rp 1,575 at the end of February. It further rose, to Rp 2,650, by the end of March.
Lippo Securities market share has risen from 3 percent for the whole of last year to 6.4 percent for the first quarter of this year.
Future Outlook
The future of the listed securities company is strongly dependent on the growth of the capital market.
Some analysts believe that the JSX has the highest potential growth among the major Asian stock exchanges.
The JSX's market capitalization has dramatically increased from only Rp 0.48 trillion at the end of 1988 to Rp 187 trillion as of the end of April 1996.
JSX's market capitalization is expected to reach US$244 billion in the year 2000 with an average growth of 35 percent per annum.
"In line with the market growth we expect an earnings per share growth of 78 percent in 1996," De Queljoe said.
He said that for this year the management has expected to book Rp 32 billion in pretax profits or an increase of 86 percent over 1995's result.
The company has proposed issuing three new shares for every two old shares, to be priced at Rp 1,000, in July to raise funds of about Rp 195 billion.
A foreign-based securities company recently said in its unpublished analysis report that listed securities companies in South East Asia are excellent for long term investment.
The report cited that as of the end of 1995, Peregrine Investment of Hong Kong, for example, had increased 602 percent since its listing in 1987. Rashid Hussain of Malaysia also rose 884 percent since 1988, Finance One of Thailand by 3,620 percent since 1988 and GK Goh by 124 percent since 1990.